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Esop&#39s fabulous

It is not ground-breaking news that the struggle to attract and retain good-quality employees at all levels is becoming increasingly difficult.

Competition for staff is rising and the lure of the dotcom entrepreneurs is proving too great for many employees of traditional bricks and mor-tar institutions.

Fearing a potential recruitment crisis, employers are having to work harder and become more imaginative in the ways they reward their employees.

The golden handshake has long been used to entice employees and traditionally has proved successful in its intent. Many big organisations offer new employees up to £6,000 on their appointment as a corporate welcome.

For recent graduates with heavy debts, such a generous introduction is very appealing. However, while employers may have worked out ways to attract talent, retaining talented staff is an altogether more complicated process, hence the advent of golden handcuff schemes.

The term golden handcuffs applies to any arrangement which offers employees an incentive not to leave their current employer. The most popular form this takes is employee share options.

Under this scheme, an employee who leaves their employer before the set holding date forfeits their share options. The Government&#39s new employee share ownership plan was introduced on July 28 and attempts to “tackle the productivity gap and promote a high investment in Britain rewarding enterprise and provide fairness for all”.

Esop replaces the appro- ved profit-sharing scheme and is intended to make it even easier for companies to set up their first all-employee share plan.

The Esop is intended to allow greater flexibility than its APS predecessor, allowing companies to tailor the plans to suit their business and encompass a wider proportion of their workforce.

With Esop, companies can offer their employees the opportunity to buy partnership shares out of their pre-tax salary up to a maximum of £1,500 a year free of tax and National Insurance (based on a maximum monthly contribution of £125).

Employers can then match partnership shares by giving employees up to two free shares for each partnership share they buy. In addition, employers can also give employees up to £3,000 of shares a year free of tax and National Insurance. The award of these free shares can be linked to employees or teams reaching performance targets.

Performance-related rewards have been traditionally viewed as the domain of the sales department but more recently employers have begun extending this incentive to all grades of staff.

With the implementation of Esop, rewarding performance with shares is made an easier and more attractive proposition to both parties.

Employees have their efforts recognised and employers make moves towards their goal of longer-term employee retention.

The primary appeal to employers of the Esop is they get to set a minimum holding period of between three and five years. Employers can design the plan so employees forfeit their free shares if they leave the company within three years of appropriation.

Matching shares can also be subject to forfeiture if the associated partnership shares are sold within that same time period. However, employees who exit the trust and sell immediately will not be liable for capital gains tax.

If the shares are taken out of the trust and sold later, they are liable for CGT but only on any increase in value after the shares come out of the plan.

According to research conducted by ProShare, employee share schemes are attractive to all employees and makes them more loyal to the company, with 64 per cent saying they would be reluctant to leave the company even if it werenot doing well financially.

However, implementation is only the first stage and the momentum has to be maintained for companies to reap maximum rewards.

As a company, you can have the best employee share ownership plan in the world but if your employees do not understand how it operates or they are not interested in the plan, then the scheme will fail to reach its potential.

Companies often find that the excitement and interest generated by the launch of a new employee share plan is quickly forgotten because of poor ongoing communications and the perceived intangibility of these schemes.

Share schemes are one of the costliest employee benefit programmes companies offer, with the objective of facilitating staff retention and productivity within the company. If employees are losing interest in the schemes, then the value is greatly diminished.

ProShare&#39s research demonstrated that employees do take an interest in the progress of their share plans, with 33 per cent checking their share price daily and 34 per cent checking weekly.

However, I am confident that the popularity of all employee share plans could be boosted by at least 25 per cent and, with more freq-uent communications, employee interest and involvement in schemes could be improved.

Esops are certainly effective golden handcuffs. They improve employee retention and productivity and, more important, boost morale, creating a sense of shared company ownership.

Set-up costs may be significant but the running costs of a partnership share plan should normally be more than covered by the National Insurance savings, with the added benefit of creating a happier and more productive workforce.

If Inland Revenue estim-ates prove correct, the total number of employees having shares in a new plan is likely to reach 2.5 million in the next three to five years. Esops are going to be popular, which begs the question, can employers afford to be without a scheme of their own?

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